Gold up 6.7% in Jan on renewed prospect as safe asset

As markets had one of their worst starts to the year this January, gold once again emerged as a safe haven. Prices of the precious metal have increased 6.69 per cent in India, trading at Rs 26,550 per 10 grams in Mumbai. In international market, prices are up 5.35 per cent at $1,118.17 per ounce. Other precious metals have also shown improvements. In the Mumbai market, silver prices have gone up by 4.04 per cent.

Thomson Reuters GFMS in its price outlook for 2016, says "slowing Chinese growth and the negative outlook for the yuan should benefit gold in the medium term, the prospects look brighter for 2016". Firm's lead analyst Sudheesh Nambiath said, "Expectations for a weak rupee and bullish price forecasts have helped support physical demand in India in January, albeit at a moderate pace in comparison to volumes in the previous two months."

While the first half of January is considered inauspicious to buy gold in India, it has not prevented people from importing and buying more.

  Even premiums were around $3-5 in December but now gold is quoting at a discount of $6 per ounce to the cost of import in domestic market. This should have curtailed import significantly but that has not happened. Month is expected to end with 65 to 70 tonnes import despite 200 tonnes imported in November and December together. Traders are dumping gold in market as they are expecting two per cent import duty cut in budget leading to market price quoting at a discount. Sudheesh, however, said, "Such a reduction may reduce unofficial imports to some extent. This would also mean a hit on government revenue, which is already being impacted by the lower customs duty revenues due to the fall in gold prices". In 2015, India's gold import bill was $35 billion. A two per cent duty cut would mean the government will have to forgo revenue of $700 million or about Rs 4,600 crore.

Another issue that will haunt physical gold demand of the world's largest gold consuming country is how schemes like monetisation and sovereign bonds play out. According to a post on social media by economic affairs secretary Shaktikanta Das, in the second gold bonds issue, 3,39,000 applications were received for 3.071 tonnes gold amounting to Rs 798 crore. In the first bond issue, 917 kg gold bonds were sold. Considering 900 kg gold offered in monetisation till mid January, gold monetisation and bonds together have saved five tonnes of import. "Response to second tranche is very encouraging. Scheme certainly picking up," Das tweeted on Friday. If consistent, such response has potential to cut physical gold demand in international market.

Many assets managers may have still not considered gold as a better asset to hold in 2016. However, CLSA, one of the largest Asian FIIs, has developed Feng Sui index which is like astrology in Indian context. In a paper explaining outcome of index, CLSA has said that, "gold and silver should thrive this year." It said 2016 would be "a year of Fire Monkey".

Silver to be in deficit

Scenario for other precious metals like silver and platinum is also looking upbeat so far. According to the Silver Institute's projections released on Friday, "Industrial demand, the largest component of total silver offtake (54 per cent in 2015), is set to increase its share of total demand in 2016.

Indian silver demand in 2016 is expected to grow on the back of increased investor interest and growth in jewelry, decorative items and silverware fabrication. India imported record 7,100 tonnes silver in 2015". The institute said mine production is expected to fall five per cent in 2016 which will be first time after 2002. This will drive silver in to fourth consecutive year of deficit.

Platinum to be in deficit

The World Platinum Investment Council on Friday forecasted bullish price for the next six-year period. It predicted an average annual deficit of 250,000 ounces till 2021. David Jollie and Glaux Metal, who prepared the report, said, "Independent analysis of the fundamentals of the global platinum market supports a bul-lish price forecast for the metal over the next six-year period. Re-cycling will increase but primary supply remains constrained, while the demand side of the fundamental equation should be stronger over the period than many might initially estimate."